Jim Henry

Most investors have heard of the tulip bubble that burst in 1637. Then there was the stock bubble of 1929 that launched the Great Depression. And, of course, the housing bubble of 2008.

With home prices rising dramatically over the last five years, many are starting to worry that we’re in a housing bubble about to burst.

A bubble is an economic cycle where an asset trades at prices far above its intrinsic value. In other words, something is way more expensive than it should be.

There’s a strong argument to be made that housing is in a bubble today. Average home prices are now 40% above the Great Recession low of 2012, and even more amazing, they’re 4% above the peak of home values in 2006.

The last housing bubble set off a worldwide recession, so there’s little wonder that some are worried that today’s housing prices are signaling another financial calamity.

However, many analysts point out that conditions are quite different this time around and that all things considered, current values are only about 5.5% overvalued. Further, they add, with still high unemployment levels from COVID, even that modest estimation  isn’t sustainable and that things will cool off in the near future.

COVID itself might have triggered a housing crash a year ago, and for a time it looked as though it might, but just the opposite happened. After an initial downturn in values and sales from COVID shutdowns, real estate transactions were allowed to resume.

By then, people had discovered they could work from home. Schools began teaching virtual classes. People had more choices for where they could live and they started looking for homes in the suburbs in droves. That trend has continued over the last year, spurred on by the Fed keeping interest rates historically low.

Just why are conditions so different from 15 years ago? For one thing, lenders were far too lenient in 2006, giving loans to people who lacked the resources to keep up payments. Foreclosures rose. Some investors speculated on that bad paper and others sought to dump it.

Today, lenders are far more careful about who they lend money. Many tightened underwriting requirements as a result of the COVID shutdowns. Today’s buyers are far more qualified for loans than in 2006, making a surge in foreclosures that would precipitate a bursting housing bubble far less likely.

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With home prices rising dramatically over the last five years, many are starting to worry that we’re in a housing bubble

MANAGE | May 10, 2021

Housing Market Bubble?

By: Jim Henry

Where Faith Meets Finance

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